In investment terms, what does diversification mean?

Diversification in investment terms refers to spreading investments across various asset types to reduce risk. By holding a mix of different types of investments, such as stocks, bonds, real estate, and commodities, an investor can mitigate the impact of poor performance from any single investment. This strategy works on the principle that different asset classes often react differently to the same economic event. For instance, when stock prices drop, bond prices may remain stable or even rise, providing balance to an investor's overall portfolio. The goal of diversification is to achieve more stable returns and lower volatility over time, making it a fundamental principle in investment management. The other choices focus on concentrated strategies, which can increase risk exposure instead of managing it effectively.